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Readers, thanks for indulging me while I take a break from writing to work on other projects. The following post was one of the most popular and widely-read of anything I've written over the past several years.
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Last week we discussed expanding our thinking about competition and substitution to defeat inflation and shift power back into consumers' hands. Let's pivot now from the spending side of the ledger to the savings and income side of the ledger, and try to think creatively about attacking inflation on a second front.

Labor markets: tightening
One fortunate aspect of inflation is it tends to coincide with lower unemployment and an improving economy. Remember last post when we talked about making companies compete to sell to us? Well, this happens in labor market too. When labor markets tighten, it means employers have to compete more aggressively for workers.

This means two things. First, enterprising workers who are valued by their employers and willing to ask for what they want will get more money for the jobs they already have. Second, other opportunities are likely be opening up for you, right now, for a superior work situation. Start looking.

Both employment and wage increases tend to lag a recovery, which means now is the time to start taking advantage of the most direct way to beat inflation: get more money.

Side hustles/additional income sources
Last week we talked about monopolies in the consumer marketplace. Here's another way to think about a monopoly: if you have one job, your employer is a monopoly provider of your income. Your employer has total power over you, and it can "substitute" you right out of a job under the flimsiest of pretexts, whenever it wants!

To borrow a phrase from Nassim Nicholas Taleb's must-read book Antifragile, this makes you "fragile" to the loss of all of your income. Not good.

You cannot consider yourself to be truly robust financially if a) you have a monopoly income provider and b) your monopoly income provider can, by terminating your job, spontaneously shut off all of your income. This is why all households ought to be thinking, Wall Street Playboys-like, about what kind of side hustles they can run to supplement income from their primary job.

My domain of expertise is stock market investing, thus that's where I try to drive incremental income for my household. But there is no shortage of ways to earn extra money on the side, and plenty of resources that cover this topic better than I could. Once again, remember our primary heuristic: the more broadly we think about competition and substitution (and monopoly providers of things like our income!), the more we can eliminate various fragilities in our financial lives.

Turning an expense into an income source
One major insight from Jacob Lund Fisker's book Early Retirement Extreme is to look for ways to "monetize" your hobbies: Fisker loved bicycles, taught himself how to fix them, and gradually fell into a modest income source repairing them. Recently, I taught myself how to string tennis racquets. Now, not only have I dramatically reduced one of my largest tennis-related expenses, I'm now in a position to string other peoples' racquets for additional income!

In both these cases we've taken an inflation-prone expense and not only neutralized it, but turned it into a source of funds. I'll leave it to you to figure out where in your life you can apply this important insight.

Low overhead, low fixed costs
The late publisher Felix Dennis, in his useful book How to Get Rich, used to say "overhead walks on two legs."

I gotta be honest: that phrase makes absolutely no sense. But, well, he's from England.

What he's getting at, however, is this: never, ever, ever get yourself in a situation where you have high fixed overhead costs. Felix Dennis kept his organizations lean, mean and flexible so they could withstand anything--any kind of financial stresses. And whenever a windfall came in, rather than getting spent covering expenses and overhead, that income dropped right down to the bottom line.

Why can't we keep our households lean, mean and flexible too?

Debt = Fragility
The first and most obvious step most families can take towards making their households lean is to pay down all debts. Debt makes you fragile. It saddles you with non-negotiable monthly fixed costs that swell up your expenses, limit your flexibility, and crowd out your ability to manage inflation.

But believe it or not, debt can be an inflation fighting tool. Let me explain how.

Here at Casual Kitchen, we carry a modest mortgage on our townhome. When we first started seeing a few too many "non-beat-backable" examples of price inflation, like our auto insurance bill, our property taxes and some of the other examples I discussed in Part 1 of this post, we put a plan into place to accelerate paying off our mortgage entirely.

Our plan is to get this cost item paid off and eliminated from our household ledger for good by the end of 2018. This will create significant room in our budget to compensate for quite a bit of other sources of inflation in areas where we have less control.

A quick sidebar. Traditional economic "logic" says that borrowers benefit from periods of inflation. If you borrow money today (assuming you can do so at attractively low interest rates, a not-always-true presumption) you can then pay it back with lower-value dollars in the future. That's what the economic textbooks say at least.

The truth is debt is a fixed overhead cost burden that you are better off not having at all. The money you vaporize to service your debts could can be far better used to fund a huge savings buffer, or to fund investments in long-term, inflation-protected cash flows. Unlike a large debt load, these protect your family, making you more financially robust.

Nearly every household in our country carries a significant level of debt, which means nearly every household lights a meaningful portion of their money on fire, every month, just so they can use someone else's money to buy things they likely never even needed in the first place.

Eliminate all debt. Overhead walks on two legs. Eliminate that overhead and you'll free up room in your budget to handle all sources of inflation and then some.

Now, let's move on to our final and most powerful tool for defeating inflation.

Income generating investments
A detailed discussion on investing is beyond the scope of this post and likely beyond the scope of this blog.[1] But we'll make room here for a few general heuristics you can use to diversify your sources of income using the amazing vehicle of conservative dividend paying stocks.

I'll share a couple of examples from my personal investing activities: my dividend on my Coca-Cola stock has more than quadrupled since I bought my first shares in 1999. Since the financial crisis in 2008-2009, JP Morgan hiked its dividend from a post-crisis low of 5c a share to 56c [ed: now 80c] a share, an eleven fold increase [ed: now a sixteen fold increase].

I have yet to see a product in the consumer marketplace inflate prices at that kind of rate, not even status-signalling iPhones.

Which reminds me! Apple stock paid its first quarterly dividend in 2012, a modest 38c a share. In the five years since, the company has nearly doubled the dividend, a growth rate of some 15% a year.

I don't know if we can expect these types of dividend growth rates going forward, but you can put a relatively high level of confidence on all of these companies, and many others like them, increasing their dividends over time at rates equal to or exceeding inflation. Thus dividend paying stocks should be one of the pillars of your overall investment strategy.

Conclusion and review
Once again, let's return to Galbraith's "at-risk" households: those with no control over their income, no control over prices they pay, and "no capacity to protect themselves by increasing their own returns." While we can't control everything--here and there we will have to eat a price hike--we now have several tools we can use to increase our "capacity" to protect ourselves and our families from inflation:

* Think about competition and substitution as broadly and as empoweringly as possible
* Improve your brinksmanship: increase your ability to say "no" to more and more products and services in the consumer marketplace
* Avoid monopoly and oligopoly providers in as many forms as you can
* Ruthlessly strip out overhead ("overhead walks on two legs")
* Relentlessly pay off all debts (debt = fragility)
* Save more, both into a large emergency fund and into income generating investments
* Don't let your job be a "monopoly income source"--diversify away from it now, even if you do so in small steps at first.

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